Now in its fourth year, the war between Russia and Ukraine has increased demand for drones, jets, radars, naval ships, and AI-related military software. Palantir (PLTR) benefited from software sales to the government. Demand will only continue after the U.S. and Israel strike military locations in Iran.
The U.S. indicated plans to continue or to increase bombings in Iran. The White House held discussions with major defense contractors. It wants those firms to increase production of weapons.
Defense firms cannot quickly ramp up output. They need to secure materials, rare earths (where China is a big supplier), and knowledgeable staff. Assuming that executives claim that they may increase production quickly, shares of Lockheed Martin (LMT), RTX (RTX), L3 Harris (LHX), and Northrop Grumman (NOC) should trade higher from here.
Realistically, production levels will not increase. If Iran effectively attacks nearby bases cheaply, it would increase defense costs for the U.S. and the Middle East neighbors. That would encourage all parties to discuss a ceasefire.
Shares of drone maker Aerovironment (AVAV) are one of the investments showing weakness. AVAV stock peaked at over $400 in January. It closed at around $230 last week after an analyst downgraded the stock.
Other defense contractors might underperform. Investors priced in the high odds of increased production. That could set up a “sell on the news event.”
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